MASTER'S THESIS

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UNIVERSITY OF STAVANGER BUSINESS SCHOOL

MASTER'S THESIS

STUDY PROGRAMME:

Master of Science: Business and Administration

THIS THESIS HAS BEEN WRITTEN WITHIN THE FOLLOWING FIELD OF SPECIALISATION:

Applied finance

TITLE:

Valuation of Hunter Group ASA

AUTHOR(S) SUPERVISOR:

Mads Holm Candidate number:

2056

………

Name:

Rebekka Lyngnes Ramsland

……….

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Executive summary

This thesis conducts a valuation of Hunter Group ASA (Hunter Group) in order to determine the company’s intrinsic value to be able to give a buy, sell or hold recommendation of the stock related to the current market price. Hunter Group is an investment company currently operating within the crude tanker industry. Therefore, an introduction of the crude tanker industry following an introduction of Hunter Group was given. Thereafter, a strategic analysis was conducted as the company and its operating environment should be analysed to understand its strategic position. After this, an analysis of the financial statements was conducted.

Subsequently, the forecasting of cash flows could begin, as the strategic analysis and the analysis of financial statements previously conducted were the basis for the forecasts. This was combined with external sources of information to arrive at the best possible estimates. The suitable cost of capital was also estimated, using WACC and CAPM. The forecast of the cash flows and the cost of capital were then used to do a discounted cash flow analysis.

Hunter Group’s calculated intrinsic value of equity was NOK 6,93 per share. The noted stock price on the 10^th of May 2021 was NOK 3,09. Based on this, the stock of Hunter Group was estimated to be undervalued, and a buy recommendation of the stock was given. Nevertheless, as there is uncertainty related to future outcomes, a sensitivity analysis was conducted. It was the WACC and freight rates that were chosen as the subjects for the sensitivity analysis. The estimated stock price was not sensitive to changes in WACC, and a little sensitive to changes in freight rates. However, both of these would have to change substantially for the conclusion of the discounted cash flow analysis to change. Finally, a relative valuation was conducted.

However, as this method has its limitations and Hunter Group does not have any good comparables, the method was only used as a supplement and to increase the understanding of the fundamental analysis already conducted. Looking at the different multiples and reviewing which were most relevant determining the value, this also concluded that the stock of Hunter Group was undervalued.

Consequently, the conclusion was maintained; the stock is undervalued, a buy recommendation of the stock is given. It was also discussed that the stock has significant upside potential over the

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Table of figures

FIGURE 1:COMPANY STRUCTURE (HUNTER GROUP ASA,2021A, P.4; OWN CREATION) ... 7

FIGURE 2:THE DISTRIBUTION BETWEEN THE THREE LARGEST SHAREHOLDERS AND THE REMAINING ONES OF HUNTER GROUP (HUNTER GROUP ASA,2021A, P.49; OWN CREATION) ... 8

FIGURE 3:HUNTER TANKERS’ ORIGINAL VLCCS (HUNTER GROUP ASA,2020B; OWN CREATION) ... 9

FIGURE 4:HUNTER TANKERS’ CURRENT VLCCS (OWN CREATION) ... 10

FIGURE 5:HISTORICAL DEVELOPMENT OF HUNTER GROUP’S SHARE PRICE BASED ON DAILY ADJUSTED CLOSE (YAHOO FINANCE,2021; OWN CREATION) ... 11

FIGURE 6:SUMMARY OF SWOT ANALYSIS (OWN CREATION) ... 22

FIGURE 7:THE BREAKDOWN OF ROCE INTO ITS DRIVERS (PENMAN,2013, P.366; OWN CREATION) ... 28

FIGURE 8:THE ESTIMATED STOCK PRICE’S SENSITIVITY TO CHANGES IN WACC(OWN CREATION) ... 60

FIGURE 9:THE ESTIMATED STOCK PRICE’S SENSITIVITY TO CHANGES IN FREIGHT RATES (OWN CREATION) ... 61

Table of tables

TABLE 1:HUNTER GROUP’S REFORMULATED BALANCE SHEETS OF 2019 AND 2020(OWN CREATION) ... 24

TABLE 2:HUNTER GROUP’S REFORMULATED INCOME STATEMENTS OF 2019 AND 2020(OWN CREATION) ... 26

TABLE 3:ROCE OF HUNTER GROUP IN 2019 AND 2020(OWN CREATION) ... 29

TABLE 4:RNOA OF HUNTER GROUP IN 2019 AND 2020(OWN CREATION) ... 30

TABLE 5:FLEV OF HUNTER GROUP IN 2019 AND 2020(OWN CREATION) ... 31

TABLE 6:NBC OF HUNTER GROUP IN 2019 AND 2020(OWN CREATION) ... 32

TABLE 7:OPERATING SPREAD OF HUNTER GROUP FOR 2019 AND 2020(OWN CREATION) ... 32

TABLE 8:PM OF HUNTER GROUP IN 2019 AND 2020(OWN CREATION) ... 33

TABLE 9:ATO OF HUNTER GROUP IN 2019 AND 2020(OWN CREATION) ... 33

TABLE 10:HUNTER GROUP’S RNOA EXPLAINED FROM PM AND ATO(OWN CREATION) ... 34

TABLE 11:HUNTER GROUP’S ROCE EXPLAINED FROM RNOA,FLEV AND THE OPERATING SPREAD (OWN CREATION) ... 35

TABLE 12:CURRENT RATIO OF HUNTER GROUP IN 2019 AND 2020(OWN CREATION) ... 36

TABLE 13:FORECASTED FREIGHT RATES (LIAN ET AL.,2021; OWN CREATION) ... 39

TABLE 14:FORECASTED PREMIUM TO FREIGHT RATES FOR HUNTER GROUP (OWN CREATION) ... 42

TABLE 15:FORECASTED NUMBER OF VESSELS FOR HUNTER GROUP (OWN CREATION) ... 43

TABLE 16:FORECASTED DAYS HIRED PER VESSEL OF HUNTER GROUP (OWN CREATION) ... 44

TABLE 17:FORECASTED REVENUE FOR HUNTER GROUP (OWN CREATION) ... 45

TABLE 18:FORECASTED OPEX FOR HUNTER GROUP (OWN CREATION) ... 46

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TABLE 19:FORECASTED SURVEY COSTS FOR HUNTER GROUP (OWN CREATION)... 46

TABLE 20:FORECASTED SALE OF ASSETS FOR HUNTER GROUP (OWN CREATION) ... 47

TABLE 21:FORECASTED G&A EXPENSES FOR HUNTER GROUP (OWN CREATION) ... 47

TABLE 22:FORECASTED CHANGE IN 𝛥𝑂𝑁𝑊𝐶 IN USD1000 FOR HUNTER GROUP (OWN CREATION) ... 48

TABLE 23:FORECASTED FCFF IN USD1000 FOR HUNTER GROUP (OWN CREATION) ... 50

TABLE 24:PRESENT VALUES OF HUNTER GROUP'S FCFF(OWN CREATION) ... 58

TABLE 25:DISCOUNTED CASH FLOW VALUATION OF HUNTER GROUP (OWN CREATION) ... 58

TABLE 26:VALUATION OF HUNTER GROUP BASED ON EV/EBITDA,EV/EBIT AND EV/R MULTIPLES (OWN CREATION) ... 66

TABLE 27:VALUATION OF HUNTER GROUP BASED ON P/E AND P/B MULTIPLES (OWN CREATION) ... 68

Table of equations

EQUATION 1:ROCE(PENMAN,2013, P.366) ... 28

EQUATION 2:ROCE(PENMAN,2013, P.365) ... 29

EQUATION 3:RNOA(PENMAN,2013, P.318) ... 30

EQUATION 4:FLEV(PENMAN,2013, P.366) ... 31

EQUATION 5:OPERATING SPREAD (PENMAN,2013, P.366) ... 31

EQUATION 6:NBC(PENMAN,2013, P.367) ... 32

EQUATION 7:PM(PENMAN,2013, P.373) ... 32

EQUATION 8:ATO(PENMAN,2013, P.373) ... 33

EQUATION 9:RNOA BROKEN DOWN INTO PM AND ATO(PENMAN,2013, P.374) ... 34

EQUATION 10:CURRENT RATIO (DAMODARAN,2012, P.49) ... 36

EQUATION 11:QUICK RATIO (DAMODARAN,2012, P.49) ... 36

EQUATION 12:CALCULATION OF FORECASTED REVENUE FOR HUNTER GROUP (OWN CREATION) ... 39

EQUATION 13:FREE CASH FLOW TO FIRM (TITMAN &MARTIN,2016, P.28) ... 49

EQUATION 14:WACC(TITMAN &MARTIN,2016, P.102) WHERE ... 52

EQUATION 15:CAPM(TITMAN &MARTIN,2016, P.114) WHERE ... 53

EQUATION 16:ADJUSTED BETA (BERK &DEMARZO,2020, P.476) ... 55

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Preface

This thesis is written as the final part of my education to achieve a MSc in Business Administration at the University of Stavanger. My chosen specialization is within applied finance. Consequently, I found a thesis within valuation very interesting. In addition, it was a good opportunity to show much of what I have learned during the program.

I decided to do a valuation of Hunter Group. They define themselves as an investment company, but currently operate only as a crude tanker company, which can give an interesting perspective to a valuation. In Norwegian financial newspapers, their name appears on a regular basis and this poked my interest to learn more about the company and determine their intrinsic value. In addition, there did not appear to be any other published theses about Hunter Group, which I found intriguing as it would allow me to contribute with something new. In addition, it would allow me to build the analysis completely from scratch, using theory and combining it with own judgements.

Working with this thesis has taught me a lot. It was exciting to learn more about a business I did not know anything about before. In addition, it was inspiring to gain experience

putting theory into practice for a real valuation of a company. Working with the thesis also gave me more confidence to trust my own judgements. I believe this makes me more ready for the job market, and I look forward to getting more practical experience, building on my theoretical foundation from the University of Stavanger.

I would like to thank my supervisor, Mads Holm, for his support and advice during this process.

Stavanger, 10^th June 2021

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1 Introduction

The crude tanker industry is volatile, as crude tanker companies operate within the oil value chain and consequently are affected by the entire world economy. There have been a lot of changes in the crude tanker industry recently, especially with the implementation of IMO 2020.

IMO 2020 is a regulatory demand for low sulphur emissions which came into force in 2020 (Kleiven & Segrov, 2019). This is a consequence of the environmental awareness, which will continue to make its mark on the industry.

Hunter Group ASA (Hunter Group) is an investment company currently operating within the crude tanker industry. Their name has been spotted in articles in Norwegian financial newspapers a lot over the last few years. Statements like “Best in class” (Segrov, 2021b), “Earns more than their competitors” (Segrov, 2021b), “All the money will be returned to the shareholders” (Kleiven & Segrov, 2019) and “Predicted rise” (Segrov & Strandli, 2020) arouse interest in the company. In addition, the fact that they define themselves first and foremost as an investment company and their philosophy of returning all surplus cash to shareholders contribute to this interest. Are they trading for the correct price? What is their strategic position?

How are their future prospects? What drives their profit? Should one invest in this company?

The main purpose of this thesis will be to find Hunter Group’s intrinsic value. This will make it possible to give a recommendation to buy, hold or sell the stock related to the current market price. As a result, the research question is defined as follows:

What is the intrinsic value of Hunter Group?

To answer the research question, the thesis will in chapter 2 start with an introduction to the crude tanker industry. Chapter 3 will give an introduction to Hunter Group and establish some general information about the company. Thereafter, a strategic analysis will be conducted in chapter 4 as the company and its operating environment should be analysed to understand its strategic position in order to do a valuation. The strategic analysis will be done using a PESTEL analysis, Porter’s five forces analysis, and a SWOT analysis. After this, an analysis of the financial statements will be conducted in chapter 5. This will be done through a profitability

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Group’s free cash flow. In chapter 7, the fundamental analysis will finally be conducted. Firstly, the proper cost of capital will be estimated, and thereafter the discounted cash flow analysis will be conducted using the forecasted free cash flow and the cost of capital. The result will be the estimated intrinsic per share value of equity, which can be compared to the current stock price to determine if the stock is undervalued, correctly priced or overvalued. Based on this a recommendation to buy, hold or sell can be given. Chapter 8 will conduct a sensitivity analysis of the estimated stock price to deal with some of the uncertainty related to the future outcomes.

A relative valuation will be performed in chapter 9 as a supplement and to increase the understanding of the fundamental analysis already conducted. It is also useful to get a grasp of Hunter Group’s value relative to its competitors. Finally, chapter 10 will conclude the findings, and contain a discussion on upside and downside potential related to the target price.

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2 The crude tanker industry

This chapter will elaborate on the crude tanker industry in which Hunter Group operates. It will go through the organisation of the industry, regulations, its relation to the oil industry and key market drivers. This should give necessary information on how value is created in the sector and other elements that could affect the valuation of a company in this industry.

2.1 Organisation of the industry

The crude tanker sector is the industry consisting of oil tankers transporting large quantities of crude oil from its production point to refineries (Euronav, 2018, p. 11). In addition, they can also be utilised as floating storage for oil (Lian, Bye & Tryggvason Lanesskog, 2021, p. 43).

Hence, they operate in a business-to-business environment, with the key customers being oil companies who consider shipping as an important part of their logistical chain (Euronav, 2018, p. 12). Crude tankers operate by trade routes. However, these are not static as they depend on oil flows, which will vary (Euronav, 2018, p. 16).

Crude tankers are often participating for both spot market contracts and time charter contracts.

Getting a spot contract means getting a contract to transport crude oil between ports. Here you get paid per unit of cargo transported and the shipowner covers all costs associated with the voyage except cargo handling costs. On the other hand, the vessel can get time chartered. Here the ship owner is paid for chartering the vessel to a customer at a fixed payment (Euronav, 2018, p. 11). The customer to the crude tanker company is often referred to as the charterer of the vessel (Euronav, 2018, p. 13). The charterer covers all voyage costs. Earnings in this sector is often reported as “dollars per day”, also known as the “Time Charter Equivalent” (TCE) (Euronav, 2018, p. 11). When a charterer requires a tanker to ship oil, they often get in touch with a ship broker. The ship broker contacts a number of vessel owners to negotiate price, terms and conditions (Euronav, 2018, p. 13).

There are various sizes of tankers, in which the two largest are “Very Large Crude Carrier”

(VLCC) and “Ultra-Large Crude Carrier” (ULCC) (U.S. Energy Information Administration, 2014). The largest tankers typically operate longer international trade routes, as it is most cost- efficient due to their size (Euronav, 2018, p. 16). In addition, the larger vessels are dependent on large ports that can physically accommodate their size (Euronav, 2018, p. 16). The VLCCs

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take about 2 million barrels of crude oil per shipment, and ULCCs about 3 million barrels of crude oil per shipment (U.S. Energy Information Administration, 2014). VLCCs are responsible for most shipments of crude oil around the world (U.S. Energy Information Administration, 2014). ULCCs on the other hand are less common as there are very few docks that are large enough (U.S. Energy Information Administration, 2014).

Naturally, it takes some time constructing these large tankers, due to their size. Usually, it will take at least 2 years from the ordering of the tanker until it is delivered (Euronav, 2018, p. 11).

Due to their size the vessels cannot be constructed anywhere, and the construction sites that are fitted are placed in Asia (Euronav, 2018, p. 11). The price for contracting a tanker newbuilding is highly variable, as it is influenced by among others the underlying price of energy, steel, labour costs and available construction finance (Euronav, 2018, p. 11). Another thing that influences the price is the relative demand for new vessels. This can influence both the price and time to delivery (Euronav, 2018, p. 11). The price of a new VLCC has ranged from around USD 80 million to USD 160 million over the last ten years (Euronav, 2018, p. 11). A new vessel is paid for gradually under the construction, but with most of the payment on delivery (Euronav, 2018, p. 11).

2.2 Regulation

The crude tanker industry is highly regulated to ensure safety for the crew, the cargo and the environment (Euronav, 2018, p. 16). One regulatory demand is IMO 2020, which will be elaborated on in chapter 3.1. Another large part of the regulations is associated with surveying the vessels in dry docks. Until the vessel is 15 years, it has to undergo a survey in dry dock every 5^th year (Euronav, 2018, p. 16). The vessels need to have certification of classification society, an independent organization that establishes and maintains technical standards for the operation of all ships (Euronav, 2018, p. 16). When the vessel is more than 15 years, it needs to get intermediate surveys between the 5 years special surveys, meaning they need a survey every 2,5 years in total (Euronav, 2018, p. 16). In addition to needing more surveys, the surveys become a lot more expensive the older the vessel (Euronav, 2018, p. 16). The first survey when the vessel is 5 years typically costs USD 1,5 million, and the survey of a 20-year-old vessel typically costs USD 4 million (Euronav, 2018, p. 16).

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The older the vessel, the higher is the overall risk for carrying crude oil (Euronav, 2018, p. 16).

As a result, some charterers do not use vessels over the age of 15 (Euronav, 2018, p. 16).

However, most tankers find employment up until they are approximately 20 years, some trade for longer (Euronav, 2018, p. 16). Statistics for tankers that has been scrapped since 2009 shows that the average scrapping age for VLCCs has been around 20 years (Euronav, 2018, p. 16).

2.3 Connection with the oil industry

As the tankers are transporting crude oil it is self-explanatory that what happens in the oil market will impact the crude tanker industry. Consequently, the oil industry has a huge say for the tankers, as it takes part in the energy value chain where crude oil is a commodity. The greater the demand for a commodity, the greater the demand is for its transportation (Euronav, 2018, p. 14). Oil demand is highly price sensitive, and as a result, the demand can be very volatile (Euronav, 2018, p. 11). This results in a volatile demand for crude tankers as well. The understanding of the oil business and the oil price are crucial understanding the crude tanker industry. For example, low oil prices represent an opportunity for consumers of oil to stockpile.

This increases demand and benefits the crude tanker sector (Seth, 2019). However, in the case of low oil demand, the negative effect on crude tanker demand is somewhat reduced as the vessels also can be utilised as floating storage for oil which increases when demand is low.

Historically, there has been spotted some seasonality in the tankers market (Euronav, 2018, p.

17). This can be explained by the crude tanker industry’s connection with the oil market. The freight rates have tended to perform better during the first and fourth quarter of the year (Euronav, 2018, p. 17). As 90% of the world’s population is living in the northern hemisphere, more oil is consumed during the cold months, resulting in this seasonality (Euronav, 2018, p.

17). However, this seasonality has been less apparent in recent years (Euronav, 2018, p. 17).

This can be explained by an emerging market in Asia, where oil demand is less dependent on seasonal consumption patterns (Euronav, 2018, p. 17).

2.4 Key market drivers in the industry

Knowing the market drivers in an industry is crucial to understand the whole business.

Understanding what impacts the market of the business and therefore what drives the potential value, is necessary to be able to analyse and value a company operating in that specific industry.

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The key market drivers in the crude tanker industry are the demand of oil, supply of oil and the vessel supply (Euronav, 2018, p. 14-15). Firstly, the demand of oil is affecting the production of oil, which again affects the demand for transportation. Secondly, the supply of oil will affect the demand for transportation, as the supply of oil affects the price of oil, which again affects the demand of oil. Thirdly, the vessel supply is a very important market driver in the industry, in accordance with theory of price. If there is a shortage of ships available, the price will go up, and the other way around. In other words, the demand and supply of oil affects the demand for vessels and the supply of vessels is the number of vessels available. The supply of tankers is mainly affected by the capital flow in and out of the industry and the availability for financing (Euronav, 2018, p. 17).

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3 Hunter Group

This chapter will introduce Hunter Group and establish general information about the company to best be able to analyse and value the company. First, some general information about the company will be given. Following are some information about their fleet and their part in Tankers International. Finally, the historical development of their stock price will be displayed.

3.1 General information and history

Hunter Group is a Norwegian investment company listed on the Euronext Expand. For now, their investment is in their wholly owned subsidiary, Hunter Tankers AS (Hunter Group ASA, 2020a, p. 4). This relationship is displayed in figure 1. Hunter Tankers is a shipping company, transporting crude oil. Consequently, Hunter Group operates within the crude tanker industry.

Their fleet was built in South-Korea from 2018-2020, and hence they are a relatively young tanker company.

Figure 1: Company structure (Hunter Group ASA, 2021a, p. 4; own creation)

Hunter Group is a continuation of Badger Explorer ASA, a Norwegian oil service company, and they changed their name to Hunter Group while still being an oil service company. Hunter Group became a tanker company in April 2018 when an order of 4 VLCCs and an option for 3 more was placed (Hunter Group ASA, 2018a). The Badger explorer technology is organized in the subsidiary Indicator AS (Hunter Group ASA, 2020a, p. 4). This technology is for exploring

Hunter Tankers

AS

Hunter Group

ASA

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company has no employees and has zero activity in 2020 and the cash burn is close to zero (Hunter Group ASA, 2021a, p. 4). Consequently, this subsidiary will not be considered further.

Figure 2 displays the distribution between the three largest shareholders of Hunter Group and the remaining ones. Clearly, Apollo Asset Limited is the largest shareholder. Apollo Asset Limited is the investment company of Arne Fredly. Arne Fredly is also a board member of Hunter Group (Hunter Group ASA, 2021a, p. 7).

Figure 2: The distribution between the three largest shareholders and the remaining ones of Hunter Group (Hunter Group ASA, 2021a, p. 49; own creation)

Hunter Group’s objective is to return all surplus cash to shareholders, either through dividends, buybacks or deleveraging (Hunter Group ASA, 2020b). The foundation of their business and value proposition is related to the cost of the vessels and IMO 2020. Firstly, when the VLCC newbuildings were ordered, VLCCs were historically undervalued, and the fleet of existing VLCCs was ageing (Jallal, 2019). Hence, it is a huge potential for capital appreciation within a few years. This was identified by fact that the value of ships in the industry was exceptionally low, yet that the underlying balance of supply and demand was beginning to improve (Jallal, 2019). Secondly, all their ships meet the criteria for IMO 2020 in the form of scrubbers, which is an upside of Hunter Group being a relatively young tanker company. IMO 2020 is a regulatory demand for low sulphur emissions which came into force in 2020 (Kleiven &

Segrov, 2019). Either the vessels need to have scrubbers, which cleans the emissions, or they

Apollo Asset Limited

29%

Sundt AS 7%

Songa Capital AS 7%

Others 57%

SHAREHOLDERS HUNTER GROUP ASA

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have to use a much more expensive fuel with lower sulphur containment to meet the requirements (Kleiven & Segrov, 2019). This represents a competitive advantage as this allows for using much cheaper fuel for their tankers. This is one of the key elements in their business plan. As Jallal (2019) puts it; “The commoditisation of VLCCs made it difficult to tell a new story to potential investors – that is until IMO changed the rules on fuel”. IMO disrupted the commoditization of VLCCs (Jallal, 2019). In addition, due to Hunter Group’s modern VLCCs, they consume lower fuel on a like-for-like basis than older VLCCs (Jallal, 2019). Hence, in addition to the cheaper fuel due to the scrubbers, they also use lower fuel in general as their vessels are able to utilise the fuel more efficient. As a result, Hunter Groups TCE earnings can be nearly three times that of a 2002-built VLCC (Jallal, 2019).

3.2 Fleet

As mentioned, Hunter Group started their tanker business by ordering 4 VLCCs and placing an option for 3 more (Hunter Group ASA, 2018a). The board almost immediately decided to exercise the options (Hunter Group ASA, 2018b). Consequently, they started their crude tanker business having 7 vessels on the way, as seen in figure 3. They were delivered between September 2019 and August 2020 (Hunter Group ASA, 2020b).

Figure 3: Hunter Tankers’ original VLCCs (Hunter Group ASA, 2020b; own creation)

However, Hunter Tankers has sold some of their original VLCCs. They made an agreement to sell Hunter Saga and Hunter Laga in October 2020 for a total of USD 168,4 million and they were delivered shortly after (Hunter Group ASA, 2020c). In February 2021 it was announced that they also had made an agreement to sell Hunter Atla and the vessel is to be delivered soon (Hunter Group ASA, 2021b). It was sold for USD 84,5 million (Hunter Group ASA, 2021b).

Hunter Tankers

AS

Hunter Atla

Hunter Saga

Hunter Laga

Hunter Freya

Hunter Disen

Hunter Idun

Hunter

Frigg

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Figure 4: Hunter Tankers’ current VLCCs (own creation)

3.3 Tankers International

Hunter Group’s VLCCs take part in Tankers International where they are available in the spot market when they are not time chartered. Tankers International is a company that pools together VLCCs (Tankers International, 2020d). They started their business in year 2000 and have since then built their world leading fleet of modern crude carriers (Tankers International, 2020d).

Their pool has a reputation of being professional, trustworthy, flexible and service minded (Tankers International, 2020d). As Tankers International (2020d) puts it; “All our participants have proven high standards of ship management and top-quality vessels that meet the essential safety requirements set for membership”.

Internally, Tankers International has divided their pool into sub-pools (Tankers International, 2020c). This is due to the recent development in the market with more diverse VLCCs (Tankers International, 2020c). For example, one sub-pool is for scrubber fitted ships, one for non- scrubber fitted ships and one is for vessels aged 15 years and older (Tankers International, 2020c). These characteristics comes with different trading patterns and earnings potential, and by internally dividing into these sub-pools it ensures a fairer sharing of earnings and costs (Tankers International, 2020c).

Tankers International can be described as a commercial asset manager for Hunter Group’s fleet.

They provide a physical hedge for owners by ensuring a stable cash flow during volatile market conditions whilst still being able to take advantage of market upsides (Tankers International, 2020b). Tankers International trade the VLCCs on an equal basis, which results in all participating owners sharing the revenues (Tankers International, 2020b). The revenues are

Hunter Tankers AS

Hunter Freya Hunter Disen Hunter Idun Hunter Frigg

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shared based on their “Pool Pointing System” (Tankers International, 2020b). A vessel’s share of the total earnings is set by its theoretical earnings potential relative to the rest of the fleet (Tankers International, 2020b). The “Pool Pointing System” is based on vessel specific data and market data, combined with a standardized calculation method (Tankers International, 2020b). Pool points is adjusted twice a year to account for changing trading patterns, fleet composition, market level and bunker prices to ensure a fair weighting (Tankers International, 2020b). Earnings is typically distributed to the participants twice per month depending on market conditions and working capital needs (Tankers International, 2020b). These revenues are presented as pool revenues in Hunter Group’s income statement (Hunter Group ASA, 2020a, p. 30).

3.4 Historical development of share price

Figure 5 displays the historical development of the share price of Hunter Group. The graph indicates that the development of price has been relatively stable over the years, the trendline would almost be linear. However, there are some positive spikes. The largest boom is between September and December 2019. Over this period the 3 first vessels were delivered, and this could be contributing to the increased share price. In addition, it was in September 2019 they announced that Tankers International was selected as their commercial asset manager.

However, future growth prospects and risk probably also affected the share price a lot.

Figure 5: Historical development of Hunter Group’s share price based on daily adjusted close (Yahoo Finance, 2021; own creation)

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4 Strategic analysis

In order to do a valuation, the company and its operating environment should be analysed to understand its strategic position. This chapter will therefore conduct a strategic analysis of Hunter Group. First, an analysis of the macroenvironment will be carried out, following an analysis of the microenvironment of Hunter Group.

4.1 Analysis of the macroenvironment

The environment is what gives a company their means of survival (Johnson, 2013, p. 33). To conduct a strategic analysis of Hunter Group the macroenvironment that impacts the company needs to be considered. This section will therefore discuss different macroenvironmental factors impacting Hunter Group and will be done through a PESTEL analysis. The analysis of the macroenvironment will also go one level deeper and analyse the industry that Hunter Group is part of using a Porter’s five forces analysis.

4.1.1 PESTEL analysis

PESTEL is an acronym for political, economic, social, technological, environmental and legal (Johnson, 2013, p. 34). This framework categorises macroenvironmental elements into key types (Johnson, 2013, p. 34). These factors are often interconnected but going through each type helps highlighting potential issues and drivers of change (Johnson, 2013, p. 33-34). This is highly relevant for analysing potential opportunities and threats.

4.1.1.1 Political factors

Political factors concern the role of the state and other political forces affecting the company (Johnson, 2013, p. 34). The oil industry is often highly state regulated as it is a natural resource.

As the crude tanker industry is in direct relation with the oil industry, this also affects the tanker business. Due to this, there are a lot of governmental regulation, trade restrictions, political stability issues and so on. One example is the U.S. sanctions on Iran, which in short leads to U.S., one of the largest oil importers, not importing oil from Iran because of its nuclear program (Seth, 2021). Several oil producers are limited by similar sanctions, and this affects the amount of oil to be transported and the trade routes for crude tankers. Other political impacts will be elaborated on in the section “Legal factors”.

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4.1.1.2 Economic factors

Economic factors concern different macroeconomic factors that the business should consider in order to understand how its markets are affected by the economy as a whole (Johnson, 2013, p. 36). The level of interest rates is one such factor Hunter Group will be greatly affected by.

This is a consequence of the company being very capital intensive. The business requires expensive tankers, which need to be financed. A large amount is financed with debt, and as a result the company’s performance will depend on the interest rate level which influences the cost of financing. The interest rate level will also have a say for the company’s possible future investments. A higher interest rate level means that fewer investments become profitable, and vice versa.

As Hunter Group operates within the oil value chain, the oil price is also a macroeconomic factor affecting them. The oil price is affected by global supply and demand. For example, low demand for oil reduces the price, which leads to oil companies extracting less oil. Consequently, this reduces the demand for transportation of oil. The oil price is very volatile, and this causes volatility for Hunter Group as well (Euronav, 2018, p. 11). It is tankers operating in the spot market that get most affected by this. The overall state of the economy and the economic growth contributes to changes in the oil price and are consequently macroeconomic factors also affecting Hunter Group. When the economy is experiencing an upswing, more oil is demanded and consumed, resulting in an increased demand for crude tankers and giving an upswing in this specific market as well.

Hunter Group will also be exposed to fluctuations in exchange rates. The 1^st of January 2019 Hunter Group changed its presentation currency from NOK to USD as the main transactions in 2019 and going forward will be in USD (Hunter Group, 2020a, p. 3). Despite of this, they still have some NOK transactions, for example related to tax as they are listed in Norway. This exposes them to risk of an unfavourable change in the exchange rates.

4.1.1.3 Social factors

Social factors concern changes in cultures and demographics (Johnson, 2013, p. 36). For Hunter Group it is especially demographic factors related to increased population and increased wealth in emerging markets that affects them. These factors increase demand for oil and result in increased demand for crude tankers. However, there is also a social factor affecting demand in

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the other direction. This is the ongoing health consciousness which is continuing to increase.

People are becoming more caring for the environment and also their own health. IMO 2020 is a result of this. IMO 2020 is likely to reduce strokes, asthma, lung cancer, cardiovascular and pulmonary diseases (International Maritime Organization, 2019). It will also help prevent acid rain and ocean acidification (International Maritime Organization, 2019). Other than IMO 2020, this changing social factor is making people shift to more environmentally friendly energy sources, also reducing demand for oil and consequently demand for crude tankers. One example is the increased use of electrical cars instead of fossil fuel cars.

4.1.1.4 Technological factors

Technological factors concern innovations in technology that may affect the operations of the industry and the market favourably or unfavourably (Business-to-you, 2016). Arne Fredly himself has said that other technologies will come allowing vessels to use liquified natural gas or hydrogen as fuel (Kleiven & Segrov, 2019). This aligns well with the increased focus on the environment and health in the society. Despite of this he talks optimistic about their decision to invest in VLCCs with scrubbers at the time; as the price of high-sulphur-containing fuel has declined, scrubbers will be the more profitable option in the short and medium term (Kleiven

& Segrov, 2019). It is beneficial for a company to know what is going on technology-wise in the market, as this will allow the company to make more well-prepared decisions for the future and spending their money right.

4.1.1.5 Environmental factors

Environmental factors in the PESTEL analysis stands for “green” environmental issues such as climate change, pollution and waste (Johnson, 2013, p. 36). For Hunter Group, these factors are strongly related to the factors of the other categories. The increased focus on the environment and health have and will continue to create changes in the industry. This can impose additional costs, as Hunter Group needs to adapt. For example, a few are criticising that scrubbers only move the pollution from the air to the sea, as they are still using fuel containing a high amount of sulphur (Kleiven & Segrov, 2019). This could result in more pressure from environmental activists on developing other types of fuel.

One consequence of the increased pollution is global warming. This will likely increase the amount of extreme weather, which is another environmental factor affecting Hunter Group.

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Extreme weather will make their voyages riskier. There are insurances that can protect them from economic losses, but if there are to be more extreme weather, the price for such insurances is very likely to go up (Seth, 2019).

4.1.1.6 Legal factors

Legal factors concern legislative and regulatory constraints or changes (Johnson, 2013, p. 36).

IMO 2020 is one such regulatory constraint for the crude tanker sector. IMO 2020 is a regulatory demand for low sulphur emissions which came into force in 2020 (Kleiven &

Segrov, 2019). Either the vessels need to have scrubbers, which clean the emissions, or they have to use a much more expensive fuel with lower sulphur containment to meet the requirements (Kleiven & Segrov, 2019). All the vessels of Hunter Tankers meet the criteria for IMO 2020 in the form of scrubbers. Aligned with the increased focus on the environment and health there can be new, more stringent requirements in the future.

Another legal factor affecting Hunter Group is the Norwegian shipping tax scheme. The scheme is voluntary, and shipping companies can choose between this tax scheme and the regular national one (KPMG, 2021). However, the shipping tax scheme will be the most profitable option for most shipping companies, aligning well with the purpose of the scheme. The reason for this special tax scheme is the industry’s international and mobile character, and the purpose is to establish a competitive Norwegian shipping tax scheme (KPMG, 2021). Companies within the scheme have tax exemption for their shipping income but are taxable for financial income (KPMG, 2021). In addition, the companies pay a moderate tonnage tax (KPMG, 2021). Being part of this shipping tax scheme, the company must comply with a number of legal requirements. One example is the extensive registration of tonnage in order to get correct tax reporting. Another is the requirements that they cannot own operating assets other than ships and vessels (Skatteetaten, n.d.).

4.1.2 Porter’s five forces analysis

Porter’s five forces analysis helps identify the attractiveness of an industry in terms of five competitive forces: extent of rivalry between competitors, threat of entry, threat of substitutes, power of buyers and power of suppliers (Johnson, 2013, p. 41). An attractive industry is one with high profit potential (Johnson, 2013, p. 41). When these five forces are high, the industry

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is not attractive to compete in, as the forces will all combine to squeeze profits (Johnson, 2013, p. 41).

4.1.2.1 Competition in the industry

Competition in the industry concerns rivalry between the existing players in the industry (Johnson, 2013, p. 41). The crude tanker sector is currently competitive. There is a large number of vessels globally, creating rivalry over being hired. However, it appears that the rivalry has not caused too aggressive price cuts, as there are still profits to collect, especially for the companies with low costs. Hunter Group is among those, as their vessels are fitted with scrubbers allowing them the cheapest fuel and the fact that they bought their vessels on a low in the market.

In the near future, it looks like competition may be reduced. Firstly, there is an all-time low order book for new VLCCs (Hunter Group ASA, 2020b). In addition, there are 181 VLCCs turning 15 years or more by 2022, which is approximately 22% of the current fleet (Hunter Group ASA, 2020b). Some charterers do not use vessels over 15 years (Euronav, 2018, p. 16).

These factors will likely result in less competition for Hunter Group in the future and increase profit potential.

4.1.2.2 Threat of entry

Threat of entry concerns how easy it is for others to enter the industry (Johnson, 2013, p. 44).

This is determined by different barriers to entry, which need to be overcome by new entrants if they are to participate in the competition (Johnson, 2013, p. 44). Firstly, in the crude tanker industry there are high investment requirements for entry. You need to have vessels to operate, and preferably more than one. Secondly, it can be hard for new entrants to get chartered. Hunter Group solved this issue becoming part of Tankers International, using them as a commercial asset manager. However, not everyone is allowed to take part in Tankers International. The participants need to have proven high standards of ship management and top-quality vessels that meet strict safety requirements (Tankers International, 2020d). These barriers result in a reduced amount of new competitors, and therefore higher profit potential. On the contrary, one factor lowering the barrier to entry is the small differentiation of service in the industry. The transportation of crude oil is pretty much the same no matter who gets hired, except if the charterer has some preferences of the age of the vessels or if it is fitted with a scrubber or not.

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4.1.2.3 Threat of substitutes

Threat of substitutes concerns the threat that there might be developed products or services that offer a similar benefit, but have a different nature (Johnson, 2013, p. 45). Substitutes can reduce the demand, and even make the initial product or service completely obsolete (Johnson, 2013, p. 45). For the crude tanker industry, it is hard to imagine new innovations on the way to transport such large amounts of oil. One candidate is pipeline transport, but this has existed for many years already and are most used for transporting oil nationally and to nearby countries, not in the same international scale as VLCCs.

4.1.2.4 Power of buyers

Power of buyers concerns the immediate customers and their power (Johnson, 2013, p. 45). If the buyers are powerful, they can demand reduced prices (Johnson, 2013, p. 45). In the crude tanker sector, there seem to be sort of an equal power dynamic. When an oil company requires a tanker to ship oil, they often get in touch with a ship broker. The ship broker contacts a number of vessel owners to negotiate price, terms and conditions and acts as an intermediary (Euronav, 2018, p. 13). Tankers International (2020a) states that when someone is to hire their ships, they are entering a mutually beneficial partnership and that their customers already confirm extraordinary service levels, fair business practices and high ethics. Based on this the relationship between the oil companies and owners of the vessels seems to be relatively fair and respectful and are not associated with an abuse of power.

4.1.2.5 Power of suppliers

Power of suppliers concerns the suppliers and their power (Johnson, 2013, p. 46). If the suppliers’ power is high, they can raise prices and capture potential profits from the company they are supplying (Johnson, 2013, p. 46). The most important suppliers of a crude tanker company are the shipbuilder and fuel provider. This power dynamic seems to be a lot like the one with buyers for crude tanker companies. In addition, low switching costs between suppliers and the fact that there are more than a few concentrated suppliers contribute to that they do not have too much power over the company. Hunter Group ordered the vessels at a low in the market, reducing the power of the shipbuilder. The shipbuilder’s power could be larger when there is an upswing in the market.

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To conclude, looking at all the competitive forces, it can be argued that there definitely are profit potential in this industry. All the competitive forces can be classified as moderate.

Therefore, it can be argued that the industry is competitive, but there are potential for profits for the companies able to exploit their opportunities.

4.2 Analysis of the microenvironment

Elements in the macroenvironment are mostly the same for companies operating within the same industry, and cannot explain why some companies achieve success, while others fail (Johnson, 2013, p. 69). To understand this, one need to look at the company’s microenvironment in the form of their company-specific strategic capabilities (Johnson, 2013, p. 69). An analysis of the microenvironment of the company contributes to a better understanding of the company and makes it easier to understand how capable they are dealing with potential risks and opportunities compared to their competitors. A SWOT analysis will be conducted as an analysis of the microenvironment in this chapter.

SWOT is an acronym for strengths, weaknesses, opportunities and threats (Johnson, 2013, p.

91). Hence, it analyses internal and external factors affecting the company. Strengths and weaknesses are current or backward-looking, whilst opportunities and threats are forward- looking. It is the internal factors, the strengths and weaknesses, that are used to analyse the company on a micro level. The opportunities and threats are created from the external environment and are therefore based on the macroenvironmental analysis. The objective with the SWOT analysis is to identify strengths and weaknesses that are relevant dealing with changes taking place in the external environment (Johnson, 2013, p. 92). This contributes to giving an overall picture of the company’s strategic position and is summarized in figure 6 at the end of the chapter.

4.2.1 Strengths

One of Hunter Group’s strengths is their modern vessels. They have eco-design and are all equipped with scrubbers, resulting in the possibility of using cheaper fuel. The fuel is one of the main costs for a tanker company, so this gives a tremendous competitive advantage. For example, in the financial market the cost is 290 dollars per tonne for fuel containing 0,5%

sulphur for a January 2020 contract (Kleiven & Segrov, 2019). The other option, which has to be used by vessels without scrubbers, is to use fuel containing 0,1% sulphur, where the price

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was a scant 400 dollars per tonne (Kleiven & Segrov, 2019). In addition, it is expected that this spread will keep increasing (Kleiven & Segrov, 2019). Due to Hunter Group’s modern VLCCs, they also consume lower fuel on a like-for-like basis than older VLCCs (Jallal, 2019).

Related to the strength having modern vessels is also the age of the vessels. The crude tanker industry is known for age discrimination by the customers (Lian et al., 2021, p. 35). The older the vessel, the higher is the overall risk for carrying crude oil (Euronav, 2018, p. 16).

Consequently, younger vessels get hired more often and are paid better, and this will be a sold strength for Hunter Group the next 5 to 10 years when their vessels are still young.

Another strength of Hunter Group is its investment in the VLCCs at an all-time low of VLCC prices (Jallal, 2019). Compared to companies with VLCCs bought at a different time, Hunter Group will have lower total financing costs as they paid less for the vessels. In addition, they are more likely to be able to sell vessels with a profit.

Hunter Group also gains a lot of advantages by being part of Tankers International. By pooling VLCCs, Tankers International has the largest fleet world-wide (Tankers International, 2020d).

Their large size generates a lot of benefits for its participants in the fleet. For example, their revenue and cash flow are improved due to the regular distribution of income, participants achieve economies of scale reducing a lot of costs and get access to more customers because Tankers International has a global presence (Tankers International, 2020a).

Another strength is their philosophy of paying out all profits to investors. Hunter Group’s objective is to return all surplus cash to shareholders, either through dividends, buybacks or deleveraging (Hunter Group ASA, 2020b). This could attract a lot of potential investors and give them easier access to financing, so that they do not need to depend as much on bank financing. Of course, this depends on whether investors believe that Hunter Group is able to generate surplus cash and that they are best used being paid out and not to be reinvested in the company. For now, most of the distribution of funds to investors has been through dividend payments. Paying dividends can signal that they are expecting a steady income in the future, as well as surplus liquidity, and therefore it sends a positive signal to the market.

Yet another strength is a dedicated and resourceful owner. Arne Fredly, which owns 29,3% of

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of NOK 26 million, with an interest rate of 5%, all costs included (Christensen, 2019). This is better terms than they would receive with any bank (Christensen, 2019). This indicated that the main owner of Hunter Group really believes in the company and its ability to generate profits from the financing (Christensen, 2019). This also sends a positive signal to the market.

4.2.2 Weaknesses

One weakness of Hunter Group is their little diversified business. Even though Hunter Group define themselves as an investment company, they only have investments in the crude tanker market, even more narrowed in the VLCC market. If it were to be less need for transport of the specific amount of oil and within the specific trade routes that VLCCs operate, Hunter Group would struggle. A lot of competitors are somewhat more diversified, for example owning vessels of various sizes and/or for transporting other various goods.

Another weakness is associated with being a small business. With this comes a lack of improved economies of scale. Larger tanker companies are able to negotiate better terms of for example fuel and agency costs and are also able to reduce administrative costs. However, this weakness is somewhat reduced by being part of Tankers International.

4.2.3 Opportunities

One of Hunter Group’s opportunities is related to their young and modern fleet. The total global fleet of VLCCs are ageing, and in some years, there can be a low supply of these crude tankers.

This is an opportunity for Hunter Group to make higher profits on their missions transporting crude oil. Of course, a lot can change before this happens, as more VLCCs can be ordered.

However, as will be discussed below, the threat of a coming technological shift is causing a reluctance on ordering new ships (Kleiven & Segrov, 2019). This will give Hunter Group the opportunity to exploit a low supply of crude tankers. Historically, good times in the tanker market have led to a stream of new contracts at the shipyards, but this time it seems to be different, probably due to the technological uncertainty (Kleiven & Segrov, 2019).

Another opportunity is the continued increase in consumption of oil in emerging markets. Asia, among others, is in a period of increased production and wealth, which increases consumption of oil. This could increase demand for crude tankers and in addition give longer trade routes with higher profits.

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4.2.4 Threats

A threat for Hunter Group is the risk of decrease in demand. This could be inflicted by the supply or demand for oil. If there is less oil available or less oil demanded, the total need for transportation decreases. This will cause lower prices, and possibly deteriorate profits from being chartered.

The environmental movement can also be a significant threat to Hunter Group. There is an increased awareness of the pollution of oil. This has given a greater focus on alternative energy sources that are polluting less. If other energy sources increase in the future, consumption of oil will decrease. If this gets signifiable low, this could reduce Hunter Group’s potential voyages transporting crude oil, as well as drive prices for chartering down.

Another threat is related to possible technological shifts in the market. With IMO 2020 Hunter Group exploited such a technological shift and grasped this as an opportunity. However, if there is to be yet another shift, it could be more difficult to use this to their advantage, as their VLCCs are built before this potential shift. Arne Fredly, Hunter Group’s largest shareholder, said to Kleiven and Segrov (2019) that there is great uncertainty about technological shifts, and one is a potential transition to the use of liquefied natural gas or hydrogen as fuel as the sector is likely to meet stricter emission requirements.

There are also threats related to their voyages. Risky routes include a risk of pirates seizing the tanker and demanding ransom. The vessels can also be damaged by bad weather or accidents.

Insurance can cover some of the costs associated with this, but such insurance is rather expensive (Seth, 2019).

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Figure 6: Summary of SWOT analysis (own creation)

MASTER'S THESIS

MASTER'S THESIS

Executive summary

Table of contents

Table of figures

Table of tables

Table of equations

Preface

1 Introduction

2 The crude tanker industry

2.1 Organisation of the industry

2.2 Regulation

2.3 Connection with the oil industry

2.4 Key market drivers in the industry

3 Hunter Group

3.1 General information and history

Hunter Tankers

AS

Hunter Group

ASA

SHAREHOLDERS HUNTER GROUP ASA

3.2 Fleet

Hunter Tankers

AS

Hunter Atla

Hunter Saga

Hunter Laga

Hunter Freya

Hunter Disen

Hunter Idun

Hunter

Frigg

3.3 Tankers International

Hunter Tankers AS

Hunter Freya Hunter Disen Hunter Idun Hunter Frigg

3.4 Historical development of share price

4 Strategic analysis

4.1 Analysis of the macroenvironment

4.2 Analysis of the microenvironment

Strenghts -Low fuel costs -Young fleet

-Vessels bought at an all-time low of VLCC prices

-Part of Tankers International -Philiosophy of paying investors -Dedicated and resourceful owner

Weaknesses

-Low diversification

-Small size gives low economies of scale

Opportunities

-Low supply of VLCCs in the future -Increased oil consumption in

emerging markets

Threats

-Decrese in demand

-Increased environmental focus -Technological shifts

-Bad weather

-Pirates